Proving Bad Faith against a Governmental Agency does not Necessarily Entitle the Contractor to the Recovery of Penalties and Attorneys’ Fees

In A. Scott Enterprises, Inc. v. City of Allentown, the Pennsylvania Supreme Court determined that even if a jury finds that a governmental agency acted in bad faith in not paying a contractor in accordance with its contract, the award of penalties and attorneys’ fees provided for under the Commonwealth Procurement Code is a determination within the discretion of the trial judge.

The factual dispute giving rise to the decision stems from the construction of a road by the City of Allentown in which it awarded a 2.9 million dollar contract to A. Scott Enterprises. Prior to soliciting bids, the City’s engineer and the County suggested that the City perform exploratory testing because of the likelihood of contaminated soil. No such testing was performed by the City and the contract made no reference to the potential of contaminated soil. During the performance of the work, A. Scott Enterprises discovered arsenic contaminated soil. While A. Scott Enterprises proposed to move forward with construction on a time and material basis, the City refused. The City continually rejected A. Scott Enterprises’ price proposals, refused to allow demobilization, and would not terminate the contract. Ultimately A. Scott Enterprises initiated litigation to recover its costs. At trial the jury found that the City had breach the contract and had withheld payment to A. Scott Enterprises in bad faith awarding it $927,299.00.

At the end of trial, A. Scott Enterprises motioned the court to award penalties and attorneys’ fees based on the jury’s finding of bad faith. The trial court, stating that the award of penalties and attorneys’ fees was within the discretion of the court, denied the request given the conflicting testimony as to damages presented by A. Scott Enterprises. The Commonwealth Court reversed finding that despite the use of the word ”may” in the Procurement Code an award of penalties and attorneys’ fees was automatic when a finding of bad faith was made, otherwise the finding of bad faith is meaningless with no consequence to the government agency having been found to have acted in bad faith.

In reversing the Commonwealth Court, the Supreme Court limited its review to a statutory interpretation of the Commonwealth Procurement Code. It found that the use of the word “may” was intended to confer discretionary authority on the Court in determining whether to award penalties and/or attorneys’ fees and that the trial court’s decision would only be reversed for abuse of discretion. Because the trial court below did not sufficiently explain its denial of an award of penalties and attorneys’ fees the matter was sent back to the trial court for a proper determination.

The Supreme Court refused to provide a standard for the court to follow in making a determination of whether to award such damages. The Court did state that given the extreme conduct necessary to support a finding of bad faith, the instances where a finding of bad faith is deemed not to require the award of penalties and attorneys’ fees at all presumably will be rare.

This ruling now obligates contractors not only to establish bad faith but also persuade the trial judge that imposition of penalties and attorneys’ fees is appropriate given the facts of the case. Unfortunately, other than stating that a denial of such damages presumably will be rare, the Supreme Court has provided no guidance on the factors to consider.